Should Manmohan Be PM?

In 1994, private airlines carried 36 lakh passengers, as much as half of the number of people that erstwhile monopoly Indian Airlines flew that year. Today, there are an incredible—for those who remember pre-reforms India—35 industries, from agricultural machinery to software, from ceramics to soya products, which get automatic approval of 51 per cent foreign equity holding. This in a country where Nestle was forced to masquerade as Food Specialities Ltd, and Cadbury's as Hindustan Cocoa Products! And Philips was allowed to make TV sets, but not name them Philips! In 1991-92, foreign direct investment (FDI) cleared by the Government was Rs 1,170 crore. Between March and November 1995, it was Rs 25,927 crore. For the first time in post-Independence India, the number of jobs being created every year—7.2 million—is higher than the number of people coming into the job market—seven million.

But there are a lot of things too which have not changed. Government spend remains ruinously high and a drain on the whole economy. Few sick industries are still allowed to close down and end their torment. The reforms have hardly touched the agricultural sector. And there is the niggling suspicion that notwithstanding government statistics, a disproportionately high part of the fruits of reforms have gone to the upper middle classes and the rich, and the rich-poor divide has widened.

Also, it may be more appropriate to talk about the three-and-a-half years of reform rather than five. For the day the Congress turned in disastrous results in the four assembly elections of 1994-95, the reforms seem to have been put on hold. In a few cases, one can even discern a slight retreat. This is wrong and may prove to be dangerous. The need of the hour is to expand liberalisation into areas untouched by it, and speed it up across the board. The effects of the halting of reforms can be seen all around us, in the perilously weak rupee, slowing foreign investments, stagnant stockmarkets and the suffocating credit squeeze industry is being subjected to.

To take a definitive look at the first five momentous years of liberalisation, we commissioned market research agency MODE to poll senior business executives on the achievements of liberalisation in eight areas, ranging from industry to the rich-poor divide. In the meantime, Outlook spoke to dozens of economists, politicians and chief executives to get their detailed impressions of the economic reforms as also liberalisation's unfinished agenda. We caught up with World Bank Vice-President Joseph Wood in London to get the Bank's assessment of Manmohanomics, while correspondents fanned out across India in an attempt to understand liberalisation at its most visceral level: how lives of people from all walks of life have changed as Manmohan Singh stood the country's traditional economic thinking on its head. What follows is the story of the great experiment that we are living through: how things have changed, and often, how they have not.

Industry: A

In 1994-95, 265,612 cars were sold. And projects to manufacture 645,000 more cars per year are either being implemented or have been proposed

THE A grade given to the finance minister for stimulating industrial growth can be credited to a sin-gle move: the banishment of the licence raj.

Before reforms were initiated, practically every notable industry was licenced. Today, industrial licensing does not extend beyond 16 industries, apart from five others reserved for the public sector. Says economist Jairam Ramesh: "The Government has managed to induce an investment boom, especially in sectors like electronics, automobiles, textiles and capital goods. Mind you, these sectors were not exactly high growth industries in the '80s."

Industrial growth, stagnant in 1991-92 due to the pre-reform hangover, grew by only 2.3 per cent in the next fiscal year because the Government had to clamp down on money supply, which, combined with a declining savings rate, reduced the availability of money for investment. Industry was, however, back on track in 1993-94. In spite of the huge credit squeeze in the last six months, growth in 1995-96 should be close to the double-digit mark, if not more. This ind-ustrial revival was spearheaded by the capital goods sector, which witnessed a 25 per cent growth last year, apart from consumer goods, which have been growing at over 8 per cent. The combined annual rate of industrial growth during the reform period is expected to be 5.5 per cent. Says Shashanka Bhide, chief economist, National Council of Applied Economic Research (NCAER): "Reduction in import tariffs provided more competition and spurred growth."

The sum total of loans disbursed and capital raised in the primary market by industry went up from Rs 5,757 crore in 1991-92 to Rs 22,000 crore in 1993-94. "In the last four years, India has attracted over Rs 40,000 crore ($12 billion) in equity from abroad," says Rajive Kaul, president, Confederation of Indian Industry (CII). And despite industry's complaints of a credit squeeze over the last year, the Government points out that disbursement of non-food credit has risen by 22 per cent this year. Which indicates that investment demands by industry have been growing faster than the steady clip at which credit availability has increased.

However, as Rolf Luders, former finance minister of Chile and architect of one of the world's most successful privatisation programmes, notes: "I wouldn't term selling 5 per cent stake in a public enterprise as privatisation." Until public sector monoliths are truly privatised and their productivity increased, industrial reform will not even have reached the half-way stage.

Agriculture: B

In 1989-90, the Government bought paddy at Rs 185 a quintal, today, it is Rs 360. In 1991, issue price for common rice was Rs 2.89 per kg. Now, it is Rs 5.97

WHAT has the Government done? As far as agriculture is concerned there has been no liber-alisation," says Sharad Joshi, chief of the farmers' organisation Shetkari Sanghatana. And despite his known radical views on agriculture, in this case at least, most observers tend to agree with him. No wonder our respondents aren't too impressed and give the reforms a B as far as the agricultural sector isconcerned. For, consistent agricultural growth in these five years has much more to do with sheer luck—eight successive good monsoons—than anything else.

First the achievements. The Government has managed to raise rural non-farm employment by 25 per cent during its tenure. And as Manmohan Singh proudly proclaims, the real wages of the unskilled agricultural worker have actually gone up during his tenure (though some independent calculations claim otherwise). Reforms may have also managed to turn the terms of trade in favour of the farmer. "His input costs are now lower than the price at which he sells the produce. Earlier he had to rely on subsidies," points out Jairam Ramesh. Bhide gives the Government another pat on the back for providing a better trade regime for agricultural exports, though he complains that restrictions are still there on import of agricultural products.

Joshi, however, claims that the Government has done little to market agricultural exports, adding that it has not workedtowards adding value to the country's agricultural produce. Ports remain clogged and storage facilities are still archaic. Economist Kirit Parikh disagrees, saying, "In rice, if you export more than your quota, prices would tumble and you would be better off with domestic prices." And in wheat, India still has to establish its credibility, with buyers currently wary of signing long-term contracts with India.

The most worrying trend: the growth rate of gross capital formation in agriculture—that is, the long-term money invested in the sector—has declined considerably, once even registering negative growth during the reform period. There has been virtually no improvement in rural infrastructure and irrigation facilities still reach only about 35 per cent of the total cultivated area. And despite the fact that ours is primarily an agrarian economy, agriculture still doesn't have parity in terms of technology and finance. All in all, status quo prevails.

Controlling Inflation: B

In 1989-90, average train passenger fare per km was 9.5 paise. In 1995-96, it's 17.7 paise

THE inflation figures do not mean anything," fumes Jaya Satish, a middle-class housewife fromMadras. "The Government should stop releasing such absurdities as it makes no sense either for the Government or for the voters. The sole purpose it serves is to strengthen our belief that the Government can only tell lies." Our respondents seem to agree with her, as they give the finance minister a B on controlling inflation.

And despite what it terms as its best efforts, this

Government hasn't been better at controlling inflation than any previous regime. In fact, it may have been worse. The average inflation rate over five years prior to the reform period was 8.5 per cent, less than in the reform years. Barring the current inflation rate of roughly 5 per cent, the past five years have by and large witnessed double-digit inflation.

The Government's manic pre-election attempts to rein in inflation may take a heavy toll once the general elections are over. Squeezing money supply and borrowing from the market to make ends meet has hurt industrial growth by leaving much less money in the system than industry needs. Says Xerxes Desai, managing director, Titan Industries: "We keep getting these fig-ures about inflation management every day, we keep getting delighted every week. But I think it is largely suppressed inflation." Inflation, now hammered down to an artificially low level, will shoot throughthe roof once the next government figures out that it must make the economy grow.

Says Ramesh: "The Government has really goofed in controlling inflation. Despite a four-year agricultural surplus, we have still seen food prices skyrocket." Perhaps the Government should have allowed the import of sugar and edible oils, he notes. Says BJP General Secretary K.N. Govindacharya: "The Government's claim that inflation has come down is mysterious, given the fact that prices of essential commodities continue to rise."

The Government's hollow claims are best summed up by 32-year-old Mohammad Kalim, a landless labourer working at the Badarpur Stockyard on the Delhi-Haryana border. "What has changed?" he asks, baffled. "Five yearsago, I used to earn between Rs 30 and Rs 40 daily and now, on good days, I manage up to Rs 80. But, I still send the same amount home. I don't quite understand it."

OUTLOOK-MODE OPINION POLL

Inequality: C

Consumption levels of the bottom 30 per cent of the population have fallen; spend on consumer durables among the top 10 per cent has risen sharply

CLEARLY, the rich have got richer in the last five years. But have the poor got less poor? Datashows that in our socialistic pre-reform days, distribution of consumption across income groups was improving continuously. Since 1991, however, the trend seems to be the other way around. What economists call 'the inequality coefficient' has started increasing. The GDP grew by 6.3 per cent in 1994-95, but growth in per capita consumptionremained at 1993-94 levels: 2.4-2.5 per cent. Not surprisingly, among all the parameters, our respondents give reforms the lowest grade here. We asked them a supplementary question: "Have reforms helped the rich more than the poor?" Forty-six per cent said yes, 52 per cent felt that reforms have helped both equally, and only 2 per cent felt that the poor have gained more from liberalisation than the rich have.

Says Bhaskar Ghose, India representative,Bank of New York: "The rich-poor divide has widened. The reform process has not been in place long enough for its benefits to trickle down to the lowest levels." Adds economist S.P. Gupta: "The nature of vested interests in the country is fast changing at the detriment of the large rural mass, where the majority of poor are concentrated." Adds J. Rajagopal of Coopers & Lybrand: "The experience worldwide of reforms hasbeen that despite noble intentions, the rich-poor divide increases. Basically the rich have benefited with growing business opportunities and the middle class with increasing well-paying job opportunities. My rule of the thumb: the number of beggars at the traffic signals has increased."

?However, Mukesh Gupta, vice-chairman and CEO of the Lloyds Group, disagrees: "I think the status is more or less the same. What has happened is that the divide has become more apparent. It's not that the poor have not benefited at all. Their purchasing power has definitely increased, but liberalisation has brought expensive consumer goods to the fold of the rich. This is what makes the divide apparent and, at times, blatant. But the gap hasn't increased or decreased to any substantial level from what it used to be."

The bottomline, however, remains that with relative prices of food—including ration shop prices—increasing faster, a very high GDP growth rate of 7-8 per cent will be needed in the next few years to keep the rich-poor divide constant, if not stop it from widening.

Stockmarket reforms: B

The biggest public issue in 1991 was worth Rs 246 crore. In 1995-96, IDBI raised Rs 2,250 crore

OUR respondents may have been rather harsh on the reforms in this area. For, despite the financeminister's proclaimed ignorance about the stockmar-kets, his tenure has seen a radical transformation of the capital markets.

From free pricing of share issues to allowing FIIs in, from giving the Securities and Exchanges Board of India (SEBI) the teeth the watchdog sorely needed tosetting up world-class computerised share trading systems, the reforms have been dramatic and far-reaching. "Thanks to the National Stock Exchange (NSE), we have moved from a quote-driven to order-driven market," points out U.R. Bhatt, chief investment officer, Jardine Fleming India. In fact, over the last few months, beginning with, and courtesy, the Reliance controversy, the NSE has overtaken the Bombay Stock Exchange ( BSE) as the country's leading bourse. And bourses across the country, with the BSE and the Delhi Stock Exchange (DSE) leading the way, are computerising their operations at breakneck speed just to stay in competition with the NSE.

The SEBI has been given the power to regulate stock exchanges, merchant bankers and other primary and secondary market intermediaries. Disclosure standards have been improved, prudential norms introduced and issue procedures simplified. The SEBI has also introduced a code for public issue advertisements to ensure hon-est disclosures. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices has been stopped. Private mutual funds have been permitted. There are new regulations in place governing takeovers and acquisitions, which have shot up in the liberalised atmosphere.

The results are showing. In 1990-91, cor-porates raised Rs 11,045 crore from the capital market. In 1994-95, they raised more than four times as much: Rs 44,793 crore.

But if there's one black mark against the Government vis-a-vis stockmarket reforms, it is its failure to set up depositories, which would have done away with all those slips of paper that constitute capital market trading today, a system that forgers can easily take advantage of. "The current settlement system is a major hindrance to large FII inflows. Introduction of a depository should be a national priority," says G.P. Pande, general manager, ANZ Grindlays Bank. Adds Bhatt: "It totally beats me as to why the Governmentdid not move on the depositories front earlier. It wasn't something politically sensitive at all." The Depositories Bill may finally be pushed through in the short pre-election Parliament session coming up soon.

Infrastructure: B+

Indians made 742.8 million minutes of international calls in 1993-94: 142 per cent more than in 1989-90

THERE was no area more critical to the liberalisation process than this,and the liberalisers' infrastructure campaign has been dramatic: from allowing private participation in a host of areas like power, petroleum, roads, ports, railways, airways and, of course, telecom, to the bitter controversies that a lack of transparency in the power and telecom sectors spawned. It is already clear that infrastructural reforms must take centre-stage in the next phase of reforms. Says CII president Kaul: "The high rate of growth of the industrial sector has increased the deficit we already had in infrastructure. Power shortages have increased, pressure on railways, roads, and ports has increased. Perhaps only in the telecom sector, the growth rate is higher than the industrial growth. India needs $200 billion in the next 10 years for infrastructure to be tackled fairly and squarely."

It's already difficult to imagine life before private airlines, which were allowed grudgingly and treated as second-class flying citizens, but which have, for-tunately, been permitted to soar relatively freely. By July 1995, the Government had received 243 private proposals for setting up power plants for a total capacity of 90,368 MW, involving an investment of more than Rs 3,35,000 crore.

Besides, we are witnessing the birth pangs of a vast new exciting industry—the private sector basic telephone services providers—that promises to transform our lives in the next few years.

However, in areas like roads, the privati-sation process is in confused and suspended animation. And management of government-run utilities in most cases remains as bad as ever.